While no business likes to think of its own employees as potential sources of theft or crime, it’s important to make sure your business is protected in any scenario. Employee theft and fraud are common occurrences, especially for small businesses. Securing Employee Theft Coverage can help safeguard your business from financial losses related to employee dishonesty.

What is Employee Theft Coverage?

Employee Theft Coverage, also known as employee dishonesty coverage, protects companies from theft committed by employees. Employee Theft Coverage provides financial coverage for losses or damages to money, securities, and other property resulting directly from theft committed by an employee, whether identified or not, acting alone or in collusion with others.

Employee Theft Coverage is one of the key areas of coverage under a standard commercial crime policy, and it can also be purchased on a standalone basis or bundled with other crime policies. While a standard commercial property policy can provide some limited coverage for losses due to third-party crime, it generally excludes property losses due to employee theft. Employee Theft Coverage fills this gap left by typical commercial property policies.

Is employee theft the same as employee dishonesty?

Yes, in insurance terms, employee theft and employee dishonesty generally refer to the same coverage. Employee Theft Coverage is often called employee dishonesty coverage.

Why is Employee Theft Coverage important?

Employee theft is a widespread problem that is estimated to cost employers approximately $3.7 trillion a year globally. And while you may think smaller businesses are less at risk, the reality is that small and midsize businesses accounted for about 68 percent of employee theft cases in the U.S. The Department of Commerce estimates that 30 percent of business failures are caused by employee theft. Recessions and rough economic times, especially, increase the prevalence of employee theft due to the added financial strains on your employees.

Small businesses are particularly at risk for employee dishonesty, as many lack the resources, expertise, and time to put appropriate safeguards and preventative measures in place. Moreover, owners of small businesses may be hesitant to label the few employees that they work with on a daily basis as potential risks for crime and may place a great deal of trust in long-term employees. However, data shows that long-term employees are actually more likely to steal from a business than new hires. In addition, only a small percentage of employee fraud cases are committed by employees who have had prior convictions, meaning background checks may not be a clear indicator of potential risk for employee theft.

Funds theft and check fraud are two of the most common forms of property theft by employees, but employee theft can take on many forms. It could be an employee stealing company products to sell on the black market, embezzling hundreds of thousands of dollars from company funds, or overinflating bills from third-party vendors and receiving kickbacks from the contracted company. Although you may hope that the people you’ve hired will not break your trust by stealing from your company, protecting your business from dishonest actions by employees is critical to your financial interests.

What does Employee Theft Insurance cover?

Employee Theft Insurance covers losses or damages to your company’s property, securities, or money resulting directly from theft by an employee. It could be theft committed by a single employee, a group of employees, or employees acting in concert with people outside the company. Employee Theft Coverage also covers forgery committed by employees.

Examples:

• An employee steals your company’s products and sells them on Craigslist, covering up the discrepancy by fabricating the inventory count.
• An employee in your accounting department wires money from the company into her own bank account.
• An employee alters a company check that is due to a vendor so that it is made out to the employee himself.

Does Employee Theft Coverage cover third-party crime?

No, Employee Theft Coverage does not cover crimes committed by third parties. Employee Theft Coverage is meant to cover theft and forgery committed by employees of your company. The only instance in which third parties may be involved is if an employee of yours colluded with an outside party to commit theft.

What are the key exclusions of Employee Theft Coverage?

There are a number of exclusions applicable to Employee Theft Coverage. They include:

Acts committed by owners or partners in the business

• Example: Your business partner inflated business receipts and expenses in order to pocket the additional money.

Employees who have a known history of committing theft or fraud

• Example: An employee was fired from her last job for stealing inventory, which you knew about when you hired her.

The loss of future business income

• Example: An employee sold trade secrets to a competitor company which results in a loss of potential sales in future years. Employee theft insurance will not pay out benefits for the speculated loss of future business.

Salary and benefits paid to perpetrator while he or she was committing the theft

• Example: An employee embezzled several thousand dollars over the course of a year and also earned $150,000 in wages over that same time period. Employee Theft Insurance will not cover the wages you paid out to the dishonest employee while he was stealing.

Inventory shortages

• Example: You discover a shortage in the inventory of your company’s warehouse and find out that an employee has been stealing. Unless you can provide separate evidence for the discrepancy, inventory shortages that are calculated using an inventory or profit and loss calculation will not be covered.

Legal fees, costs, and expenses

• Example: After an employee embezzles money from your company, you retain an attorney to advise you on legal issues related to this matter. Any fees or expenses-related legal action and lawsuits will not be covered.

Indirect losses

• Example: The business interruption loss that resulted from an employee stealing all of the computers in your office or the income you could have made by investing the stolen money, securities, or property.

How much does Employee Theft Coverage cost?

AdvisorSmith found that the average cost of commercial crime insurance for small businesses was $659 per year. This cost survey included small businesses in the retail, services, manufacturing, and wholesale industries with revenue under $500k, for commercial crime coverage of $500k per year.

Pricing does, however, vary depending on a number of factors, including:

• Industry. Businesses that operate in high-risk industries, like convenience stores, can expect to pay more in premiums.
• Annual sales. The more revenue your company earns, the more risk exposure your company faces, resulting in higher premiums.
• Business size. The more employees your business has, the greater the risk for crime, including employee theft or dishonesty.
• Security measures. Businesses that are able to implement security systems, cameras, and regular auditing procedures can garner reductions in premiums.
• Business property. If your business stores high-value property or keeps significant amounts of cash on hand, you’ll see a greater risk for crime.
• Claims history. As with most insurance policies, a history of frequent claims will inevitably increase your premiums.
• Coverage limits. The higher your coverage limits are, the more you’ll pay in premiums.

In order to get an accurate estimate on pricing, it’s best to get a quote from a reputable insurance company. Below we’ve highlighted a few of our trusted partners who offer commercial crime insurance:

Provider	Commercial Crime	Employee Theft	Commercial Property
CoverageSmith	??	??	??
CoverWallet	??	??	??
Embroker	??	??	??
Hiscox	??	??	??

Definition of “Employee”

It’s important to note that not everyone at your company will be considered an “employee” under Employee Theft Coverage. Employee Theft Coverage relies on a specific definition of “employee” to determine whether benefits will be paid out in the case of property theft.

In this case, an employee is any natural person:

1. While in your service and for the first thirty days immediately after termination of service, unless such termination is due to “theft” or any other dishonest act committed by the “employee”;
2. Whom you compensate directly by salary, wages, or commissions; and
3. Whom you have the right to direct and control while performing services for you.

All three of these conditions must be met in order for someone to be defined as an “employee” of your organization. Importantly, owners and partners of the company will not be covered as employees of the company.

The third stipulation on the “right to direct and control” has been the most litigated aspect of Employee Theft Coverage. Well-established legal precedents have also been set regarding other executives or shareholders of companies who operate without supervision from any other person, including the board of directors. In many of these cases, the executive/shareholder will not be considered an “employee.” Any theft involving them will not be covered under Employee Theft Coverage.

Example:

• The president of a company embezzled millions of dollars from the company’s clients to pay for vacations and other personal expenses. The board of directors consists of the president and a few other members who have no supervision over the president’s actions. In this case, the president of the organization is not considered an “employee” and the theft he committed is not covered under Employee Theft Coverage.

On the other hand, the definition of employee is inclusive of many types of workers for your company, including:

• Former employees who are retained as consultants
• Substitute workers
• Seasonal workers
• Short-term workers
• Leased employees
• Students and interns (as long as they are being paid)

As more companies are now relying on independent contractors, you might be wondering if these workers would fall under Employee Theft Coverage. The answer is no. Be aware that independent contractors are not considered employees under Employee Theft Coverage and will not be covered if they steal from your company.

Loss Sustained vs. Loss Discovered

There are two ways that Employee Theft Coverage can be written pertaining to the timing of the crime:

Under a loss discovered form, the theft would be covered as long as it is discovered during the policy period of the coverage. The theft could occur any time after the retroactive date set by the policy. Many discovery policies also include a 60-day period to discover losses. This discovery period allows you to report claims for up to 60 days after a policy ends for losses that occurred during the active policy period.

Example:

• Your Employee Theft Coverage started at the beginning of this year. An employee embezzled $75,000 in the previous year and the theft was discovered in April of this year. Because it was discovered during the policy period, the losses would be covered by the insurance policy.

Under a loss sustained form, the theft would only be covered if it was sustained and discovered during the policy period of the coverage. Many policies also allow for a discovery period of up to one year after the policy period has ended.

Example:

• Your Employee Theft Coverage started at the beginning of this year. An employee embezzled $75,000 in the previous year and the theft was discovered in April of this year. However, because the theft did not take place during the policy period, it would not be covered by the policy.

Final Word

Employee Theft Coverage is one of the most common types of insurance under commercial crime policies. Employee Theft Insurance covers many different types of thefts and many different types of employees, though notable exclusions are owners and partners of your company. Small business owners need Employee Theft Coverage to protect their companies from the very real and common risk of employee dishonesty—actions that could significantly impact the bottom line of your business.